Berkshire Hathaway’s Diamond Anniversary
Warren Buffett took control of Berkshire Hathaway sixty years ago. It is possible that major announcements will be made at the annual meeting.
Warren Buffett took control of Berkshire Hathaway sixty years ago on May 10, 1965.
For all practical purposes, Mr. Buffett should be considered the founder of the company even though the business he inherited dates back to the nineteenth century. In just a few years, Berkshire Hathaway began its transformation into a diversified conglomerate, a story that is told exceptionally well in Capital Allocation: The Financials of a New England Textile Mill by Jacob McDonough. It is certain that Berkshire would be long dead today if it had remained a textile manufacturer. Instead, shareholders attending the 2025 annual meeting will celebrate an incredible milestone.
Over the past sixteen years, I have written over three hundred articles about Berkshire Hathaway. As I look back at some of the early articles, it is obvious that I never expected Warren Buffett to be running Berkshire at the age of ninety-four. Succession planning has been a concern for decades. Consider that nearly half of Mr. Buffett’s sixty years at Berkshire came after he reached the typical retirement age of sixty-five!
Succession planning has long been a concern for Berkshire shareholders. Four years ago, Charlie Munger revealed that Greg Abel has been chosen to serve as the company’s next CEO. The question of timing remains. Mr. Buffett’s statements over the years have indicated a desire to remain in charge as long as he is capable of doing the job. Over the years, we have seen fewer public appearances but his performance at the 2024 annual meeting reassured most shareholders that he’s more than capable of doing the job.
Much has been made of a slight reduction in the time allowed for the question and answer session for the upcoming meeting but, at over four hours, the session will still be far longer than nearly any other public company. Anyone who has been on stage in front of an audience for even one hour will understand how much mental and physical stamina is required to be “under the spotlight” for so long. This is “proof of work” and rightly inspires much confidence in Mr. Buffett’s continued ability to serve as CEO. However, every year that passes brings with it the possibility of physical and mental decline. Anyone who has spent time with elderly friends and relatives knows that things can change very quickly for the worse.
There have been some recent signs that could be interpreted as preparing the shareholder community for a change in the near term.
On November 25, 2024, Mr. Buffett issued a press release announcing additional gifts to four family foundations. This followed changes to his estate plan in June 2024 announced in conjunction with annual gifts to the family foundations as well as the Gates Foundation. In the November press release, Mr. Buffett wrote that he’s grateful for his longevity but expects “Father Time” to get around to him “before long.”
A couple of months later, Mr. Buffett wrote: “At 94, it won’t be long before Greg Abel replaces me as CEO and will be writing the annual letters.” This raised some eyebrows, but obviously could simply mean that the actuarial tables make it likely that succession will occur within a few years.
Perhaps most intriguing was Berkshire’s decision to significantly changes its policy regarding director qualifications. The 2025 proxy statement revealed that directors, with a few exceptions, must retire at the age of eighty. I wrote about this decision in more detail last month. While this change attracted little attention in the financial media, it seems very much at odds with Berkshire’s policies in the past. Many of Berkshire’s most important directors in recent decades served well past their eightieth birthday.
There is no doubt that Berkshire Hathaway will change significantly when Warren Buffett finally steps down and shareholders are rightly concerned about the long term sustainability of the company’s culture. However, it is important to realize that certain aspects of how Berkshire has been run historically may not be the best way to run the company in the future. Warren Buffett is an exceptional individual, as was the late Charlie Munger. They will never be replaced. Neither will the close circle of Mr. Buffett’s business associates who served on Berkshire’s board for decades well into their nineties. Mr. Buffett’s decision to impose a retirement age for directors is best viewed as preparation for Berkshire after his departure.
We should keep in mind how difficult Greg Abel’s job will be when he eventually becomes CEO. Every decision he makes that breaks with how Warren Buffett managed the company will be scrutinized. Every time he institutes a policy that seems at odds with Mr. Buffett’s philosophy, he will be criticized. Many will question whether the company’s culture is being abandoned. In light of this reality, it is possible that Mr. Buffett is taking steps to institute changes that Mr. Abel would otherwise have to implement.
Will Warren Buffett step down as CEO during the annual meeting?
This is a possibility, but assuming that he is still in good health, the question is what role he would play at Berkshire going forward. He could remain as Chairman, but would he handle capital allocation or leave all decisions to Greg Abel? Would Mr. Abel feel comfortable making capital allocation decisions without consulting Mr. Buffett? If Mr. Buffett continues to handle capital allocation, Mr. Abel would be constrained.
It is not as if Greg Abel is an inexperienced capital allocator. He has decades of experience allocating capital for Berkshire Hathaway Energy and, since 2018, he has been in charge of Berkshire’s non-insurance operations, including decisions regarding whether to reinvest capital within operating businesses, in consultation with Mr. Buffett. However, I think it is fair to say that Berkshire shareholders might not feel the same way about Mr. Abel sitting on $300+ billion of cash for long periods of time.
This brings me to the “third rail” of dividend policy. Few topics are more controversial given how many longtime shareholders greatly value the fact that Berkshire does not generate taxable income. I count myself among those shareholders who have long preferred that cash should be reallocated within the business or used to fund repurchases. However, at a certain point, we are going to have to face the reality that cash must be distributed to shareholders via dividends, especially if Berkshire shares continue to trade at a valuation that makes Mr. Buffett unwilling to repurchase shares.
Many shareholders I have spoken to over the years doubt that a dividend will be declared during Mr. Buffett’s lifetime due to the significant personal tax liability this would impose on him. However, the problem with this assumption is that Mr. Buffett would make decisions for all of his partner-shareholders based on his own personal tax situation. I find that idea contrary to Mr. Buffett’s overall attitude toward managing the company for the benefit of all owners. In the past, both Mr. Buffett and Mr. Munger have stated that Berkshire would pay out cash if it could not be put to good use. Ultimately, there are only a few things that management can do with free cash flow and dividends are not automatically irrational.
If Warren Buffett thinks that a dividend is likely to make sense within a few years, it is possible that he might want to set the policy himself, both to have a chance to put his personal imprint on the policy and to deflect criticism that Greg Abel would otherwise inevitably have to deal with. In my opinion, the odds of a dividend announcement at the meeting are quite low, but far higher than at any time in the past.
The most logical dividend policy would be to avoid regular payouts in favor of special dividends when they make sense. However, a more practical approach might be a small dividend, perhaps around 1%, with additional payouts made as needed, with ample notice given to shareholders to aid in their tax planning.
While a regular dividend is not strictly optimal, it could have the effect of lengthening the time that longtime individual shareholders retain Class A stock. Without a dividend, many Class A shareholders who wish to raise cash choose to convert their shares to Class B stock to avoid realizing large capital gains.1 A small dividend might reduce pressure on these Class A shareholders to convert to Class B. This could stabilize the Class A shareholder base which will already be changing massively as the Buffett family foundations liquidate Berkshire Class A stock (either through direct Class A sales or conversions to Class B followed by Class B sales) in the ten to fifteen years following Mr. Buffett’s death. I have written about my concerns regarding the ownership of Class A stock in the past, most notably in my article advocating a split of the Class A stock, another “third rail” that might need to be touched at some point in the future.
Hopefully, Mr. Buffett will appear as healthy as ever this weekend and joke about breaking Methuselah’s record for longevity. But even if that is the case, I’m sure that many succession questions will come up. For the first time in many years, I will not be watching the annual meeting webcast live due to family obligations over the weekend, but I hope to watch the replay of the meeting early next week.
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Individuals associated with The Rational Walk LLC own both share classes of Berkshire Hathaway stock.
Each Class A share is convertible into 1,500 Class B shares. Each Class B share has 1/1500 the economic rights of a Class A share but only 1/10,000 of the voting rights. Therefore, a Class A shareholder who converts to Class B is giving up voting power by exercising the conversion privilege. Many longtime Class A shareholders have a very low cost basis on a stock trading at ~$800,000. Shareholders who wish to raise less than $800,000 of cash often opt to convert to 1,500 Class B shares so they can only sell the amount they need, thereby reducing the taxes owed on the sale.